The shares of Blinkx (LSE: BLNX) look as if they’ve found an inflection point. From here, after a precipitous fall, the price could go either way.
Maybe the worst is over
The internet media platform provider revealed a half-year balance sheet carrying a hefty slug of net net cash, not a mile away from the current share price, so now’s the time to look at the upside potential.
The directors sound upbeat. They think the worst is behind Blinkx and that, since July, month-on-month growth suggests trading has reached an inflection point. So, that’s two inflection points — one for the share price and one for trading — a promising sign. The firm pins its hopes for a turnaround of fortunes on mobile-related sales, which it expects to contribute approximately 20% of revenues during the current trading period.
However, the recent half-year report brought news of a gargantuan profit collapse, and revenue generation slowed “considerably” during the period, amplifying the effects of seasonally slower summer months. It’s tempting to look at the firm’s trading record and assume that it can regain past glories with profits, but that’s a big ask.
A year ago, Blinkx delivered post-tax profits in excess of $10 million, the recent six month period produced a loss of almost $10 million — that $20 million difference occurred over twelve short months, which is why we saw the share price plunge from 220p or so at the start of 2014 to under 30p today.
Enormous upside potential
If Blinkx’s profits collapsed so fast, perhaps they can resurge just as speedily? Maybe. Let’s look at the upside case:
1) Valuation
With shares trading hands at about 28p today, rather than the 220p or so they used to, we might think the valuation is lower than it was. That’s not true in terms of the firm’s price-to-earnings ratio, though.
Before the collapse in profits, the shares commanded a P/E rating around 27. Now, we expect the P/E of the current trading period to be measured in the hundreds. The opportunity comes with forward guidance, which indicates the P/E rating may fall closer to the thirties as the hoped-for recovery in profits materialises from a shift to mobile-generated business. Such a valuation works to encourage us when considered with point two:
2) Balance sheet strength
Back in November Blinkx revealed a debt-free balance sheet trumpeting around 19p per share in cash. The firm reports in US dollars, so, if you want to calculate the earnings per share in pence, don’t forget to convert to sterling before comparing the cash balance to the number of share holders — that caught me out last time!
So, given the growth potential, we might consider Blinkx good value on the strength of its balance sheet regardless of its P/E ratio. However, persistent poor profit performance could lead to the firm eating its own cash pile to survive if things don’t work out as planned. Nevertheless, the strength of the balance sheet currently works in favour of an investment.
3) Share price action
The share-price chart looks encouraging. ‘Never buy a falling share price’ is one of my own golden rules. The chart looks like the share-price fall is over and the shares could be turning up.
Share price trends are important because they show us the combined weight of all participating investors’ views. A still-falling share price shows us that investors think the firm’s prospects might deteriorate further. A flat share price, one that has lain still for a while, neither rising nor falling, tells us that investors don’t know what to think, so we can all wait and see.
Given the apparent downside protection of the firm’s cash pile, this ‘wait and see’ could mean that any positive news may be welcomed with a share-price rise as the market adjusts to accommodate the new forward consensus.
What next?
It’s tempting to bet on Blinkx pulling off a recovery on the back of a shift to a new business model driven by mobile applications. Who knows where the share price may take us if that happens. That said, Blinkx today remains a punt, as success is far from assured. There may be bumps along the way.
